Convexity Is a Desirable Feature of Bonds Because

question 6

Multiple Choice

Convexity is a desirable feature of bonds because

• A) as interest rates decline, the price of a low convexity bond decreases at a decreasing rate.
• B) as interest rates decline, the price of a high convexity bond decreases at an increasing rate.
• C) as interest rates decline, the price of a low convexity bond increases at a decreasing rate.
• D) as interest rates decline, the price of a high convexity bond increases at an increasing rate.
• E) as interest rates decline, the price of a high convexity bond decreases at a decreasing rate.

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Definitions:

Cash Outflows

Money going out of a business, including expenses, investments, and distributions to shareholders.

NPV

Net Present Value; a method used in capital budgeting to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Replacement Chain

A decision analysis tool used to choose between mutually exclusive projects with differing durations by comparing the equivalent annual annuity.

Equivalent Annual Annuity

A financial calculus method for comparing the annualized cash flows of projects with different lifespans.